Global status of the oil industry and demand for the next 25 years

The global supply of crude oil and other liquid hydrocarbons will be sufficient to meet the word’s demand for liquid fuels over at least the next 25 years, although oil consumption is predicted to start declining from 2020. Here, we look at the status of supply, demand and reserves, and the industry's outlook in the UK and worldwide.

Oil: substantial pressures on oil producers. Rig shown is in UN's Britannia field

The total world proven crude oil reserves at the end of 2015 were estimated as 1.7 bn barrels with OPEC member countries accounting for 71% of the total[1]. In 2015 the total consumption of oil and other liquid fuels was 95m barrels per day[1], growing by 1.9% relative to the previous year – almost double the recent historical average. By 2040 global demand is expected to reach 121m barrels per day[2]. The increase in demand mainly comes from emerging economies such as China and India while consumption in OECD countries continues to decline.

To meet the rise in demand, production is predicted to increase by 31m barrels per day over 2012-2040[2]. The majority of the increase in oil supply is due to growing non-OPEC supply, primarily US shale oil, Brazilian deep-water oil and Canadian oil sands[3].

UK oil: reserves, production and consumption

The total UK proven oil reserves stood at 3bn barrels in 2015[1]. The majority of these are located offshore in the UK continental shelf (UKCS) with over 90% of the total UK production based in the central and northern section of the North Sea.

After years of decline in UK crude oil production, since its peak in the mid-1980s and late 1990s, production in the UK increased by about 100,000 barrels per day in 2015[4]. The main contribution to this came from fields which came online in 2014 and 2015 as well as performance improvements in existing fields[4]. The UK is the second largest producer of oil in Europe[4] but is currently a net importer[5].

Pipelines and refining

The UK has an extensive network of pipelines which transport oil from platforms in the North Sea to coastal terminals in Scotland and northern England. The UK also has a number of onshore crude oil pipelines including a 90 mile underground pipeline which links the Wytch Farm field to the refinery at Fawley and the export terminal at Southampton.

Norpipe is the single international crude oil pipeline and it connects the Norwegian oilfields in the Ekofisk system to the oil terminal and refinery at Teesside.

There are currently six major crude oil refineries in the UK which support the inland market and are connected to pipelines for onwards distribution. The UK oil refining capacity has been declining and was approximately 1.6m barrels per day in 2015[6]. The UK's crude feedstock is primarily low sulphur crude from the North Sea. In 2013, crude oil made up 54% of total processing[6].

Types of oil produced in the UK

The three main grades of oil produced in the UK are Flotta, Forties, and Brent blends. Flotta is the smallest and lowest quality of crude and is loaded at the Flotta terminal in the Orkney Islands.

The Forties stream contributes to approximately half of the total UK North Sea production and is shipped via pipelines, to Cruden Bay where it is pumped to the Hound Point terminal.

The Brent stream, which peaked in the mid-1980s, is transported to the Sullum Voe terminal via pipelines. Despite the declining production levels of the Brent blend it serves as a key financial benchmark (Brent price).

UK offshore oil and gas industry challenges

The UK faces a number of key challenges in maintaining its offshore oil production. In 2013, £13.5bn was invested in the sector and this is expected to rise in the future[7]. Access to new fields involves operating in more aggressive environmental conditions. Despite investment in new infrastructure, approximately 50% of offshore platforms are operating beyond their originally anticipated service life[7] and therefore, management of structural integrity and life extension are key industry challenges.

Meanwhile, maximising economic recovery and maintaining fiscal stability needs to be addressed, as recommended in the 2014 Wood review[8].

Decommissioning of offshore installations is likely to accelerate from 2017 with many installations up to 5,000 wells and 10,000km of pipelines expected to be decommissioned over the next two decades[7].

The low oil price market environment places substantial pressure on oil producers, particularly in the North Sea where operating costs are relatively high. Pressure on new field development projects may lead to a significant decline in UK production in 2018 and beyond[4].

Global oil outlook

The global proven oil reserves in 2016 were estimated at 1.7 bn barrels, with more than 80% concentrated in eight countries[1].

According to the US Energy Information Administration (EIA) the global supply of crude oil and other liquid hydrocarbons will be sufficient to meet the word's demand for liquid fuels over at least the next 25 years[2].

This prediction is governed by a range of uncertainties over future supply and demand for oil, including economic growth, supply through tight crude – crude oil from shale or other tight formations – and unconventional natural gas liquids (NGLs), climate-change policies, manpower constraints and technological developments.

Figure 1 demonstrates the base case predicted trend in oil demand in relation to other sources of primary energy[3]. Fossil fuels are set to lose share in aggregate over this outlook but are expected to still remain the dominant form of energy.

In OECD countries, declines in oil and coal are expected to be offset by increases in consumption of gas and renewables, while growth in non-OECD energy is expected to be evenly spread across oil, gas, coal and non-fossil fuels[3].

Figure 1: Share of Primary Energy – Base Case Predictions

Source: BP 2016 energy outlook[3].

The rate of transition to lower carbon energy is a key source of uncertainty. In a faster transition scenario, seen in Figure 2, oil consumption is predicted to start declining from approximately 2020.

Emissions and climate change

Oil is the second most carbon-intensive major fuel – after coal – in terms of total CO2 emissions and accounted for 34% of the world CO2 emissions in 2014[9]. The following advances, associated with extraction, transport and conversion of oil, are potential areas for supporting reduced emissions associated with oil:

improved technologies for energy efficiency and emission prevention or capture.

Alternatives to oil

There are a number of technologies being developed that are designed to extract from unconventional sources of oil. For example, tight oil continues to grow along with shale gas. While only four countries – the US, Canada, Argentina and China – were producing commercial volumes of tight oil in 2014, other countries have started exploring and producing tight oil since 2015[2].